Posts from 2012

Court Of Chancery Appoints Receiver To Resolve Strategic Issues

Badii v. Metropolitan Hospice Inc., C.A. 6190-VCP (March 12,  2012)

In this case the Court appointed a receiver for an insolvent corporation under Section 291 of the DGCL.  The Court reasoned that the appointment was needed to break a deadlock over whether to implement a proposed tax strategy when there was little time left to deal with the IRS.  This illustrates when a receiver may be appointed to make business decisions.

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Delaware Chancery Court Appoints Receiver for LLC

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | March 7, 2012

The Delaware Court of Chancery recently took the largely unprecedented step of appointing a receiver for a Delaware limited liability company. While Jagodzinski v. Silicon Valley Innovation Co. LLC is a short opinion, it has large implications. Here are just a few, but first it is necessary to focus on its odd facts. More ›

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Court Of Chancery Again Denies Injunction Despite Breach Of Duty

In re Delphi Financial Group Shareholder Litigation,  C.A. 7144-VCG (March 6, 2012)

For the second time in a month, the Court of Chancery has denied an injunction against a merger despite serious breaches of duty by the lead merger negotiator.  Here the controlling stockholder refused to vote for the transaction unless he received a "bonus" in the form of more for his stock than the other stockholders were to receive on a per share basis.  This odd demand arose out of some equally odd provisions in the certificate of incorporation where the controller had agreed to equal treatment in any merger but now sought to take back that provision.  That was wrong, the Court held.  However, the deal was too good to enjoin when there was no other deal on the table and none likely to arise later if an injunction stopped the show.  Hence, out of concern for the minority stockholders, the Court let the deal go through and left the stockholders with a damage claim.

While some commentators have argued that such a result is wimpy, they do not seem to worry about the impact on stockholders of killing a deal that represents the golden goose.  The threat of a damage remedy should be enough to deter such conduct in the future,  just as it does in other contexts.

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Court Of Chancery Limits Fraudulent Inducement Claims

Schonfeld Group Holdings LLC v. Trillium Holdings LLC, C.A. 6759-VCL (March 6, 2012)

It occurs more than you might think that a party to a release later claims that the release is not binding because she was fraudulently induced to sign it.  Applying recent New York law, here the Court holds that if the release covers "unknown claims," then it cannot be set aside by an claim that it was fraudulently induced.

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Court Of Chancery Explains Priority Rule In Merger Litigation

Dias v. Purches, C.A. 7199-VCG (March 5, 2012)

It is often thought that the jurisdiction where suit is first-filed will obtain priority over later filed actions.  As this decision makes clear, that is not true when the litigation involves a representative action and Delaware corporate law applies.  For in that case, the Delaware courts will apply the doctrine of forum non conveniens that gives only slight weight to where the first suit was filed.  More important in class or derivative actions is Delaware's interest in applying its corporate law to Delaware entities.

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Court Of Chancery Adopts New Fee Setting Procedures

Danenberg v. Fitracks, Inc., C.A. 6454-VCL ( March 5, 20120)

Among the more vexing tasks of a Court is setting the fees to be awarded in an advancement case. If left to itself, this can become a monthly job as the parties endlessly quarrel over how much is to be paid. The Court of Chancery has tried several approaches to  avoid getting stuck in this endless quagmire.  Here is a new one.  The Court is charging the senior Delaware lawyers for each party with the duty to resolve any difference through a detailed process including monthly meet and confer sessions.  That may be enough to interject some sanity into these disputes.

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Court Of Chancery Applies Corporate Law Principles To LLC Dispute

Zimmerman v Crothall, C.A. 6001-VCP (March 5, 2012)

This is an interesting application of corporate law principles to an LLC dispute where the LLC operating agreement defined the managers' duties by language closely following common law duties for directors. Thus, the analysis included determining if they acted with gross negligence, were interested in 2 transactions to invoke the entire fairness test, etc.

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Court Of Chancery Declines Injunction Despite Probabililty Of Success

In re El Paso Corp. Shareholder Litigation,  C.A. 6949-CS (February 29, 2012)

This is the now-famous decision finding several breaches of fiduciary duties by the negotiators of a merger, but declining to kill the deal that would have given stockholders a large premium.  The opinion is, as usual for its author, entertaining to read.  More importantly, however, it is once again proof that money may deaden any sense of fiduciary duty, particularly any sense of when there is a conflict of interest.

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Court Of Chancery Instructs What Deal Protection Provisions Are Acceptable

In re Micromet Inc. Shareholders Litigation, C.A. 7197-VCP (February 29, 2012)

This is an excellent primer on what deal protection provisions are acceptable, particularly when the board must have the right to change its recommendation to stockholders when a superior proposal surfaces.  It is permissible to require a board to wait a short time before changing its recommendation to allow the first acquiror to match a new proposal.  However, once that matching right period passes, the board must be free to act promptly.

This opinion also provides a good analysis of the scope of any pre-deal market check and the board's role in limiting the scope of any effort to shop a deal.

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Court Of Chancery Resolves Who May Bring Derivative Claims After Dissolution

Matthew v. Laudamiel, C.A. 5957-VCN (February 21, 2012) This decision resolves who may bring a derivative claim after an LLC has been dissolved.  The argument made by 1 of the parties was that after dissolution, any member may bring a derivative claim directly.  The Court rejected that argument and concluded that the claim still must be brought in the name of the LLC and that a petition might also be filed to have the entity restored to bring such a claim or for a trustee to be appointed to do so. This decision also dealt with an important jurisdictional issue under the so-called conspiracy theory.  It holds that the alleged conspirator must be aware that the conspiracy involves an action in Delaware in furtherance of the conspiracy, before the conspiracy is completed and the harm done. Share

Court Of Chancery Restricts Transfer Of LLP Interest

In re Estate of Everett T. Conaway, C.A. 6056-VCG (February 15, 2012)

This decision upholds transfer restrictions in a limited partnership agreement.

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Chancery Court Allows Evidence in Appraisal Trial of Mandatory Redemption

Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | February 15, 2011

When a dissatisfied stockholder petitions the Court of Chancery for an appraisal of shares extinguished in a merger, the petitioner will have the burden of persuading the court of the fair value of those shares. When the holder owns preferred stock, valuation issues arise that do not pertain to the holders of common stock. That is because, unlike for common stockholders, preferred stockholders' rights, including to redemption and sometimes to valuation in the event of a merger, are spelled out contractually. More ›

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Court Of Chancery Appoints Books And Records Receiver

Jagodzinski v. Silicon Valley Innovation Company LLC, C.A. 6203-VCP  (February 14, 2012)

This is an interesting decision because the Court appointed a receiver to enforce its orders granting a right to inspect an LLC's records when the LLC management did not comply with those past orders.  How far that receiver might go in his inspection is not clear but given that the receiver is the plaintiff's own agent, pretty far seems likely.

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Court of Chancery Stays Tag-Along Litigation

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | February 8, 2012

Litigation in multiple courts over the same basic claim continues to be a serious problem for corporate defendants. Indeed, some commentators argue the problem is getting worse. It is now almost certain that any merger or going-private transaction involving a publicly traded company will generate multiple suits. In fact, even the suits themselves now generate tag-along litigation. More ›

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Court Of Chancery Explains How To Apply Hirt

In re Delhi Financial Group Shareholder Litigation,  C.A. 7144-VCG (February 7, 2012) This decision teaches how to apply the so-called Hirt facts to select lead counsel in a class action. Most notably, it holds that filing first is not as important as filing the best complaint and that co-lead counsel may work in some cases. Share